Does Being a Cosigner Affect Your Credit

Cosigning a loan or credit application can help someone secure financing when they might not qualify on their own. However, it's essential to understand the potential consequences for your credit before agreeing to cosign. 

Whether it's a personal loan cosigner, a student loan cosigner, or someone cosigning a credit card, the decision to cosign carries responsibilities that could affect your financial health. 

The cosigner meaning is more than just providing a guarantee, you're entering into a legal agreement that could influence your credit score and borrowing capacity in the future.

Cosigning means that you agree to take responsibility for a loan or credit agreement if the primary borrower fails to make the required payments. As a cosigner, you promise to repay the debt if the borrower defaults, which provides the lender with additional security.

For example, consider a situation where a young individual is applying for a student loan but doesn’t have enough credit history to qualify. They may ask their parent to cosign the loan. If the student makes timely payments, it can be a positive experience for both parties, as it helps build the student's credit and can even improve the cosigner's credit score. 

However, if the student misses payments, the parent (as the cosigner) will be held responsible, and it could harm their credit score as well.

Cosigning has a direct impact on your credit score, depending on how the borrower manages the loan or credit card. 

Below are some ways cosigning can affect your credit score:

Positive Impact of Cosigning

When the borrower consistently makes on-time payments, the loan will be reported to credit bureaus and affect both their and your credit report. For example, if a parent cosigns a student loan and the student repays it promptly, this positive payment history will benefit both parties' credit scores. The loan can add diversity to your credit mix, which is a factor that helps improve scores.

If you are a personal loan cosigner for a friend who is financially responsible, the positive payment history can have a similar effect on your credit. This is because the loan type is added to your credit report, helping to demonstrate a responsible use of credit.

Negative Impact of Cosigning

If the borrower defaults or misses payments, it can severely damage your credit score. For example, if you cosign a car loan for a sibling and they miss payments, the missed payments will show up on your credit report, reducing your credit score. 

Even though you're not the one directly making the payments, the lender sees you as equally responsible, and late payments are recorded in your credit history. This negative mark can stay on your report for years, making it harder to qualify for future loans or credit.

In a more extreme case, if the borrower defaults entirely and the loan is sent to collections, the cosigner is still liable for the debt. A collection account can stay on your credit report for up to seven years, dramatically affecting your creditworthiness.

Cosigning can be beneficial for your credit if the borrower handles the loan responsibly. Here’s when cosigning can help your credit:

If the Account Improves Your Credit Mix

When you cosign a credit card or a loan, it can add diversity to your credit profile. For example, if you have mostly credit cards but cosign a car loan, it will show a different type of credit usage (installment credit).

Having a varied credit mix is beneficial because it demonstrates your ability to manage different kinds of credit. A diverse credit mix accounts for about 10% of your credit score, so adding a loan you cosigned could improve your score over time.

If On-Time Payments Are Made Each Month

On-time payments are one of the most critical factors for improving your credit score. When the borrower makes all payments on time, it reflects positively on your credit report. 

For example, if you cosign a student loan for your child, and they make consistent monthly payments, this positive behaviour will reflect well on your credit profile, potentially raising your score.

If the Loan Is Repaid in Full

When a loan is paid off in full, it shows that the borrower (and the cosigner) handled the debt responsibly. 

For instance, cosigning a home loan can be a long-term commitment, but if the borrower repays the loan without issue, this will positively affect your credit score. The loan's closure will also show that you’ve fulfilled your obligation as a cosigner, which can improve your credit score over time.

While cosigning can improve your credit, it can also harm your score if the borrower doesn’t manage the debt responsibly. 

Here’s when cosigning can hurt your credit:

If the Account Has Late or Missed Payments

Late payments on a cosigned loan are reported to the credit bureaus and can damage both your credit and the borrower’s credit score. For example, if you cosign a credit card for a friend and they miss a payment, that missed payment will appear on your credit report. Even though you’re not the one directly making the payment, the late payment still affects your creditworthiness.

If the Account Goes to Collections

If the borrower fails to repay the loan and it goes to collections, it can severely damage your credit. Let’s say you cosign a car loan for a relative, and they stop making payments. If the lender reports the default to the credit bureaus, it will show up on your credit report as well, lowering your credit score. A collection account can stay on your credit report for up to seven years, so it’s essential to carefully consider the risks before agreeing to cosign.

If the Account Adds Significant Debt to the Total Amount You Owe

Cosigning can increase the total amount of debt you are responsible for. For example, if you cosign a loan for a friend and they take out a large personal loan, that debt is now part of your overall debt load, even though you aren’t the primary borrower. 

Lenders will consider this when assessing your creditworthiness, and having too much debt can negatively affect your ability to secure loans in the future.

Not everyone is eligible to include a cosigner, and the decision often depends on the type of loan or credit being applied for. Generally, cosigners are used when the primary borrower lacks sufficient credit history, income, or other factors that would make it difficult for them to qualify on their own.

For example, a young adult who is applying for a student loan may not have an extensive credit history or stable income. In such cases, a parent or relative may be asked to cosign. Similarly, if someone with poor credit is applying for a personal loan, they might seek a cosigner with better credit to improve their chances of approval. However, it’s important to note that not all lenders accept cosigners, and some loans, such as certain mortgages, may have stricter requirements for cosigners.

Banks and lenders typically assess the cosigner’s creditworthiness to ensure they can fulfil the loan's obligations if needed. For instance, when cosigning a credit card application, the lender will examine the cosigner's credit score, income, and other financial factors before approving the loan.

Before agreeing to cosign, it’s essential to consider various factors that could impact your credit and financial health. Cosigning is a big responsibility, and understanding the risks is crucial to making an informed decision.

Your Finances

You should assess your own financial situation before agreeing to cosign. Cosigning a loan increases the debt associated with your name, and if the borrower defaults, you could be responsible for repaying the debt. 

Consider whether you can afford the potential impact on your finances if the borrower fails to make payments. For example, if you cosign a car loan for a friend and they stop making payments, you’ll be required to step in and cover the cost.

The Borrower’s Budget and Repayment Plan

It’s important to ensure that the borrower has a solid repayment plan and budget. You should discuss the loan terms, repayment expectations, and the borrower’s ability to meet them. 

For example, if you’re a student loan cosigner for your child, have a conversation about their expected income after graduation and their plan for repaying the loan. This can help prevent financial strain down the line and reduce the risk of missed payments.

Your Rights as a Cosigner

As a cosigner, it’s crucial to understand your legal rights and obligations. If the borrower defaults, you are legally responsible for the debt, and the lender can come after you for repayment. 

Be sure to have a written agreement that clearly outlines the terms of your responsibility and how the borrower will keep you informed about payments. This can provide peace of mind and reduce the chance of misunderstandings.

Communication and Documentation

Clear communication with the borrower is essential. Ensure that both parties understand the terms of the loan and have a clear line of communication regarding payments. 

Additionally, ensure you keep all documentation related to the loan, including agreements, payment schedules, and communications with the lender. This will help in case of disputes or if the borrower faces difficulty making payments.

See if You’re Pre-approved

Before cosigning, it’s a good idea to check if the borrower is pre-approved for the loan. Many lenders offer pre-approval without affecting your credit score.

For example, if you’re cosigning a credit card application, ensure the primary applicant has been pre-approved for the card. This helps you gauge the likelihood of approval and reduces the risk of having to cosign for a loan that may not be approved.

If you’re hesitant to cosign a credit card application, there are alternatives that can provide similar benefits without the risks. These alternatives can help the borrower build credit while safeguarding your own credit score.

Add Someone as an Authorised User

Instead of cosigning a credit card, you could add the borrower as an authorised user on your existing credit card account. 

As an authorised user, the borrower can benefit from your positive payment history, which will be reported on their credit report. For example, if you have a good credit history and add your child as an authorised user, they can start building credit without the risk of cosigning a new account.

Consider Secured or Student Credit Cards

Another option is to recommend the borrower apply for a secured credit card or a student credit card. Secured cards require a deposit, which acts as collateral, reducing the lender’s risk. 

This option allows the borrower to build credit without needing a cosigner. For example, if a young adult is just starting to build their credit, a student credit card or secured card could be a great first step.